Walt Disney Co. Call Buying Gains Momentum Ahead of Earnings

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Entertainment media legend Walt Disney Co. ( DIS ) will take the earnings stage after the close of trading on Tuesday, Aug. 10, and call buyers have taken a keen interest in the company heading into the event. While the Magical Kingdom has a history of topping the consensus estimate, could option bulls be getting ahead of themselves?

For the record, Walt Disney is expected to post a third-quarter profit of 59 cents per share, a figure that is up roughly 13% from last year's earnings of 52 cents per share for the same period. Looking back, the company has bested the consensus estimate in each of the prior four reporting periods, with an average upside surprise of roughly 11%.

Potentially keying on DIS' consistent fundamental performance, options traders have pressured the stock's Schaeffer's put/call open interest ratio (SOIR) lower from a reading of 0.95, in the 73rd percentile, on July 27, to its current perch at 0.74, in the 34th percentile. Since the SOIR measures puts versus calls among options with less than three months until expiration, it is likely that this rise in call open interest is tied to DIS' quarterly earnings report.


Supporting this theory, data from the International Securities Exchange (ISE) and Chicago Board Options Exchange ( CBOE ) reveals that calls bought to open have practically doubled puts purchased during the prior two weeks. The resulting 10-day ISE/CBOE call/put volume ratio of 1.90 arrives higher than 79% of all those taken during the past year. In other words, DIS options traders have rarely snapped up calls at a faster rate than puts during the prior 52 weeks.

Checking in with DIS' open interest configuration, we find that options traders are focusing heavily on the in-the-money August 32 call strike, where more than 9,600 of these bullishly oriented contracts are currently open. Meanwhile, peak put open interest for the August series of options lies at the out-of-the-money August 31 strike, totaling 3,485 contracts. This focus on in-the-money call options and out-of-the-money put options indicates that while DIS speculators are bullish toward the stock, they have not set their sights exceedingly high.

August DIS open interest configuration

Wall Street, meanwhile, is leaning toward the bearish camp when it comes to DIS. Specifically, the equity has earned two "sells" and 13 "holds," versus 13 "buys." That said, Thomson Reuters reports that the 12-month consensus price target for the stock rests at $37.86 per share - a modest 8% premium to the stock's closing price of $34.21 on Tuesday. Given the wealth of "hold" ratings and the moderate price target, there is plenty of wiggle room on both sides of the bull/bear coin for the brokerage bunch.

Technically speaking, DIS has rallied more than 33% during the past 52 weeks, but the equity's short-term performance has been questionable. Specifically, the shares have traded in a tight range between support at the $31 level and resistance in the $35 region. Still, the stock has yet to break out of its longer-term uptrend, with DIS recently finding support at its rising 50-week moving average. This longer-term trendline has paired up with DIS' 10-week and 20-week moving averages to help push the stock higher since March 2009.

Weekly DIS chart since March 2009 with 10-week, 20-week, and 50-week moving averages

As hinted at above, there is still a major technical hurdle that could spoil the party for DIS. The stock recently dipped back below long-term resistance at the $35 level after making a run at finally breaking through this ceiling. Looking back, DIS has closed only one month above $35 per share since October 2000. With expectations on the rise heading into the company's quarterly report, it may take more than the company's typical 11% upside surprise for investors to push the shares firmly back above this long-term technical roadblock.

Monthly chart of DIS since May 2009 with 10-month moving average

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This article appears in: Investing , Options

Referenced Stocks: CBOE , DIS

Schaeffer's Investment Research

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